Ecuador - Milagro Irrigation Project

FILE COPY- DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No, 113a-EC APPRAISAL OF THE MILAGRO IRRIGATION PROJECT ECUADOR June 6, 1973 Latin America and the Caribbean Regional Office This report was prepared for official use only by the Bank Group. It may not be pubished, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accay or completenes of th report.  CURRENCY EQUIVALENTS US$1 - Sucres (SI) 25 Sucres (S/)1=US$0.04 WEIGHTS AND MSAUES 1 kilometer (kin) = 0.62 miles 1 millimeter (mm) - 0.039 inch 1 meter (a) - 3.28 feet 1 hectare (ha) = lO,OOQ m2 - 2.47 acres 1 square kilometer (k-) - 100 ha * 0.386 square miles 1 cubic meter (m3) - 1.31 cubic yards 1 million cubic meters (Mm3) - 810 acre feet 1 metric ton (m/ton) 3 2,205 lb 1 kilogram (kg) . 2.2 lb GLOSSARY OF ABBREVIATICNS INERHI - Ecuadorian Institute for Hydraulic Resources Instituto Ecuatoriano de Recursos Hidraulicos MAG - Ministry of Agriculture and Livestock 1 nisterio de Agricultura y Ganaderfa ENF N- ational Developuent Bank Banco Nacional de Fomento IERAC - Institute for Agrarian Reform and Colonization Instituto Ecuatoriano de Reforma Agraria y Colonizacidn INIAP - National Agricultural Research Institute Instituto Nacional de Investigaciones Agropecuarias FECOPAK - Federation of Agricultural and !'rketing Cooperatives Federacio" de Cooperativas Agropecuarias y de Mercadeo APU - Agriculture Production Unit NF - Ministry of Finance Ministerio de Finanzas COVERNMENT OF ECUADOR FISCAL YEAR January 1 to December 31  ECUADOR AN APPRAISAL OF THE MILAGRO IRRIGATION PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS . ........................... . i-iii I. INTRODUCTION ........................................ ...... 1 II. BACKGROUND ................ ...................... 1 III. THE PROJECT AREA ...................**. ............... 3 General ................ e.*......... O...........*.* ........ 3 Population and Land Tenure ..................... 4 Agricultural Production ........................ 5 Institutional Assistance ....................... 6 Transportation .....*********.****.*.. **** *** ** 6 Marketing ........ 00............................... IV. THE PROJECT ................. - .... ooo.o 7 Description ..o.........oo.*.........0...0................ 7 Project Works . 8 Water Supply, Demand, Quality and Rights .... o.o 10 Engineering Design .......0........ ............... 11 Adjustments of Farm Boundaries ... o............. 12 Cost Estimates .. *........ *** .............- 12 Financing ....... o- - - ..................... 13 rProcurement O............. .................. ..0 .... 14 Disbursement .... ......o....... . ..15 Accounts and Audit .... ................ -......... 15 V. ORGANIZATION AND MANAGEMENT ........... ..o.. o........ 15 Executing Agency ..... .... ...... 0 - ..... . ..... 15 Project Organization .00. * . 0.-.6.0.0. . .... .. ... . . . . . . .. 17 Consultant Services ........ . . . . . . . . . . . . . . . . . . . . 19 Implementation of Project Works ...... ..... ..... 19 Implementation of Agricultural Development ..... 20 Operation and Maintenance .....0..0... ..0........ 22 Project Charges ... o ...... . ..... . . . ...... 22 This report is based on the findings of a mission in October, 1972 to Ecuador composed of W.A. Lucas and C.G. Moret of IDA, and T.J. Bredero, consultant to IDA.  TABLE OF CONTENTS - Continued Page No. VI. PRODUCTION, MARKET PROSPECTS, PRICES AND FARM INCOME .......... ........................... 23 Production .............. . . . .... . * ....... 23 Agricultural Plan ............ ........ * ...... 25 Market Prospects ....... . . . ......... * .25 Prices ................ 26 Farm Income ................ 26 VII. BENEFITS AND JUSTIFICATION ........................... 27 VIII. AGREEMENTS REACHED AND RECOMMENDATION ................ 28  ANNEXES 1. Description of Project Area 2. Scope of the Project A. Selection and Formulation B. Project Description 3. Water Supply, Demand, Qualffy and Rights 4. Cost Estimates 5. Estimated Schedule of Expenditures and Disbursements 6. Consultant Services A. Implementation of Milagro Irrigation Project LB. Preparation of a Feasibility Study for Project Extension 7. Operation and Maintenance 8. Agricultural Production, Costs and Farm Budgets 9. Marketing 10. Economic Analysis Chart No. 7568 - Proposed Project Organization Chart No. 7273 - Construction and Development Schedule Map IBRD 10278   ECUADOR MILAGRO ILRIGATION PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for integrated irrigation develop- ment in the Milagro area in the Guayas river basin. The project would in- crease agricultural production in an area of 7,000 ha by providing irrigation for a second crop during the dry season each year. The total value of produc- tion would also be Increased by converting the existing subsistence-type agriculture to higher value crops for import substitution and export. The project would also include the necessary agricultural supporting services to assist farmers in adopting the new cropping patterns and developing market outlets. The project would be the first Bank Group assisted irrigation development in Ecuador and its fourth operation in the agricultural sector. In 1967 the Bank extended a loan of US$4.0 million (501-EC) for agricultural credit for ranch development and beef production. Subsequently two IDA credits totaling US$11.5 million were approved in January 1970 (173-EC) and December 1970 (222-EC) for expansion of the original project to assist about 800 ranches and dairy farms. Disbursements on the two former operations are almost completed; progress on the third operation (222-EC) is somewhat behind schedule due to institutional changes. ii. Agriculture accounts for about one-third of the GDP in Ecuador and increases in production since 1960 have barely kept pace with population growth. The demand for imported agricultural products has increased during the past decade while agricultural exports, which make up 90% of total ex- ports, have grown only moderately during this period. The poor performance in the agricultural sector has perpetuated the serious conditions of rural poverty and low income for smallholders. With the prospect of additional income from oil exports and improvement of both its financial and credit positions, Government is undertaking remedial measures to improve agricultural production and the economic conditions of the rural population. Irrigation has been assigned a high priority in this program and a number of projects are under study, with a substantial potential to increase production over the existing rain-fed farming. Other means being considered for improvement of rural conditions are land reform, formation of cooperatives, increased agri- cultural credit, improved supporting services and availability of inputs, all of which contribute to integrated development. There is an urgent need to increase food production and crops for import substitution such as oil- seeds, cotton and tobacco. Small and medium-sized farms, especially, are in need of these integrated services and the capability of Government agencies to manage these programs must be rapidly improved. iii. Traditionally the country has depended on agriculture in the central highlands for food production, which includes several small irrigation proj- ects. Domestic demands have outgrown the productive capacity of this region, which is also constrained by severe minifundia and over-population. This has forced Government to turn to the western lowlands for new project devel- opment, which in the past have mainly been used to produce livestock and export crops, such as sugar and bananas, on large private estates. This re- gion has exceptionally favorable conditions for agricultural production,  - ii - particularly in the provinces of Guayas and El Oro, where climate, soils and available water supplies combine to produce these conditions. A comprehensive survey of the Guayas river basin has shown that more than 200,000 ha could be developed for double cropping under irrigation, making it one of the best potential areas in the country for increasing production of both export and import substitution crops. Two projects have been selected for initial de- velopment in the basin; these are Babanoyo (11,000 ha) for rice production and Milagro (7,000 ha) mainly for oil seeds, sugarcane, bananas and cacao. IDB has been requested to assist with Babahoyo and the Bank Group with Milagro. The proposed project would provide a modern irrigation and drainage system for 7,000 ha, together with service roads and on-farm development, including land clearing and leveling for the benefit of 825 farmers, of which about two thirds have small farms of less than 10 ha. The project would also include agricultural supporting services, extension assistance, credit, stor- age, transport, marketing, seed production and realignment of farm boundaries to obtain an orderly layout of the irrigation systems. Provision for assist- ance in carrying out a feasibility study for future extension of the project would also be included. A land reform program, started in 1964, is nearly completed in the project area. The main objectives of the project would be production by providing irrigation for a second crop during the dry season, to convert the existing subsistence type agriculture (principally mixed groves of banana, cacao, coffee and other tropical tree crops) to high value crops for export (bananas, cacao, sugar) or import substitution (oil- seeds, rice, maize), to provide improved services to the farmers to assist them in making this conversion and increase production and to improve the marketing and price structure such that farmers would receive a more equit- able income from their production. iv. Thle estimated project cost is US$10.2 million, with a foreign ex- change component of US$5.3 million, including contingencies, or 51% of the total. The czrecit would be for UIS$5.5 million which, in addition to covering foreign exchange costs, would provide local currency financing of US$0.2 million for local contracting of topographic, land use and cadastral surveys for the feasibility st-udy. The balance of the project costs, equivalent to U3S 4.7 million, wouiei be financed by Government. Out of the foreign exchange component of US$5.3 million about US$2.9 million would be put out to inter- natioaal competitive bidding for the purchase of equipment. The balance con- sists of US$0.9 million for local purchase of equipment and materials and sapplies for eivil works, USS0.8 million for consultant services and US$0.7 ir13.)2On for contingencies VI The Instituto Ecuatoriano de Recursos Hidraulicos (INERHI) would have responsibility to implement both the construction and the agricultural development phases of the project. The construction of the main works, including on-farm development, would be carried out directly by INERHI while the agricultural development would be implemented by means of operating agreements with the several Government agencies who have primary responsibi- lity in the country for agricultural production, credit, extension, marketing, formation of cooperatives, seed production, research and land reform. These agencies would participate in the project in varying degrees through the  - iii - administrative and technical services established and managed by INERHI for the project. INERHI would coordinate and ensure the contribution of all agencies as required to implement a program of integrated development which would meet the needs of the farmers for technical, managerial and financial assistance. Consultant services would be provided, both for implementation of the project and for the feasibility study, in fields where INERHI has insufficient experience. vi. At full development in 1983 (year 11), following completion of construction in 1978 (year 6), the net value of production at economic prices would be about US$3.1 million, as compared to an estimated value of US$1.0 million without the project. Net incremental annual family income is estimated at US$1,470, US$2,610 and US$4,660, for small, medium and large farms re- spectively, over present levels of US$320, US$1,200 and US$2,000. Double cropping with annual crops on about 50% of the area, with irrigation during the dry season, would almost eliminate seasonal unemployment. Family labor would be fully utilized and the project would absorb hired labor equivalent to about 1,500 man-years annually. With the exception of vegetables, project production would be either for export (sugar, bananas, cocoa) or import substitution (oilseeds, cereals). At full development, savings plus earnings in foreign exchange due to the project would amount to about US$3.0 million. With costs and benefits discounted over a 40-year period, the economic rate of return would be 16%. The indirect benefits to the commercial sector of the Milagro district would provide added impetus to the economic growth which has begun during the past four years. vii. With appropriate assurances obtained during negotiations, the project is suitable for an IDA credit of US$5.5 million. The borrower would be the Government of the Republic of Ecuador, with INERHI as the executing agency.   ECUADOR MILAGRO IRRIGATION PROJECT I. INTRODUCTION 1.01 The Government of Ecuador has requested IDA assistance in financing further development of the Milagro Irrigation Project, located in the Province of Guayas in the southwestern part of the country. This would be the fourth Bank Group operation in Ecuador in the agricultural sector, the first being a Bank loan of US$4.0 million for agricultural credit for ranch development and beef production (501-EC) signed in June 1967. Subsequently, two IDA credits, 173-EC, signed in January 1970 and 222-EC, signed in December 1970, for a total of US$11.5 million, provided additional credit assistance to expand the original project to benefit about 800 beef ranches and dairy farms. Progress on these projects has been good, with satisfactory performance on the Government side and a favorable response by the ranchers. Disbursements on the two former operations are almost completed; progress on the third operation (222-EC) is somewhat behind schedule due to institutional changes. The proposed project would be the first in the country to receive IDA assist- ance for irrigation development. 1.02 The proposed project is part of a comprehensive plan to develop the land and water resources of the Guayas river basin, an area which has a strong potential for agricultural development and to which the Government has assigned high priority. Present policy is to initiate development with small projects and Milagro would be one of the first to be undertaken. The project would consist of integrated development for 7,000 ha including irrigation and drainage systems, on-farm development, roads, agricultural supporting services, exten- sion assistance, credit, storage, marketing, seed production and realignment of farm boundaries. The existing land tenure pattern in the project area, which is mainly cultivated for one crop each year under rainfed conditions, is the result of an agrarian reform program carried out by the Government beginning in 1964. 1.03 Initial feasibility studies for the project were carried out by a private consulting firm, Chas T. Main, Int., of Boston, Mass., during 1965-67. This study was financed by USAID. Subsequently the Government, with the assistance of FAO/IBRD CP on two separate missions, reformulated the project and prepared a new feasibility study. This study, completed in September 1971, forms the basis for the appraisal covered by this report. 1.04 This report is based on the findings of an appraisal mission that visited the area in October 1972. The mission included Messrs. W.A. Lucas, C.G. Moret (IDA) and T. J. Bredero (Consultant). II. BACKGROUND 2.01 Ecuador is entering into the phase of developing the oil industry which, through increasing foreign exchange earnings, should lead the economy into a faster and more balanced growth by enabling the Government to increase  its current expenditures and investments. By 1977, oil is expected to account for more than 50% of total exports. 2.02 The potential agricultural area of Ecuador is roughly estimated at about 8.5 million ha, of which only 50% is presently used. Ecuador can be divided into three natural regions: the coastal lands (Costa), where the ex- port oriented crops are grown; the central highlands (Sierra), which provides most of the country's domestic food supply and where the demographic pressure is highest; and the eastern lowlands (Oriente), a sparsely inhabited hinter-' land where the important petroleum deposits have been discovered and whose agricultural potential, although rather unknown, seems most suitable for live- stock. Leaving aside the undefined possibilities of the Oriente, the increase of agricultural production in the Sierra should be based mostly on correcting the disequilibrium between population and land and introduciag agricultural improvements, while in the Costa, general estimates indicate that there is a potential for developing irrigation schemes on some 0.6 million ha. 2.03 Agriculture contributed about 31% of GDP in 1971, providing a livelihood for 55% of the total population, occupying 61% of the total labor force and accounting for about 90% of the value of commodity exports. The main export crops, the value of which totaled US$175 million in 1969, are bananas, coffee, cacao and sugar. Bananas continue as the main export crop, reaching an annual value of US$100 million during the period 1966-69. Agricul- tural products represent about 20% of total imports but have increased rapidly in recent years. These imports include mainly wheat, tallow, soybeans and tobacco. While in recent years the economy has grown at about 7% p.a., agri- cultural growth has been considerably lower, barely keeping pace with that of the rural population. With population growing at 3.5% a year, and in- comes going up, the demand for food will increase rapidly in the decade ahead. Meat, milk, fruit, vegetables, rice, maize, and vegetable oils and oilseed byproducts will all face a strong internal demand, and domestic pro- duction will have to be increased rapidly to avoid sharp rises in the import bill for food. 2.04 In 1972 the total population of the country was estimated at 6.5 million, of which 4.0 million were in the rural sector. This sector is characterized by acute poverty and unemployment, especially in the central highlands. Development in the coastal area and opening up the Oriente are expected to increase migration which would ease the situation in the Sierra and absorb part of the expanding labor supply. This is one of the important reasons for proceeding with agricultural development in the coastal region as rapidly as practicable. 2.05 A major constraint for better performance in the agricultural sec- tor is the uneven distribution of land ownership, with the immediate conse- quence of lack of capitalization and, on the social side, a severely distorted income distribution. About 75% of farms are less than 5 ha, accounting for 10% of the total farm land; at the scale's opposite end, 1.5% of the farms are larger than 100 ha and represent 47% of the total. The lowest decile of rural population earns about 2% of agricultural income, while the top decile accounts for about 58%.  - 3 - 2.06 Important goals of Government's agricultural policy are agrarian reform, colonization, and irrigation development. The Instituto Ecuatoriano de Reforma Agraria y Colonizacion (IERAC) has primary responsibility for agrarian reform. By 1970, IERAC had, since its creation in 1964, made about 570,000 ha available to some 40,000 families. About 415,000 ha had been colonized and alloted to some 12,000 families and 155,000 ha had been redis- tributed to some 28,000 families. While the colonization program has achieved moderately positive results, on the agrarian reform side achievements have fallen short and, in general, the farmers' situation is not much better after agrarian reform than before. The major reason for this has been the lack of Government budgetary support, together with a too wide scope of IERAC's ac- tivities. The Instituto Ecuatoriano de Recursos Hidraulicos (INERHI) is the agency responsible for irrigation development. At present INERHI is operating 12 irrigation districts with an irrigated area of about 20,000 ha. In addition other agencies, mainly Government provincial offices, have constructed and are operating five small projects serving about 5,000 ha. INERHI is engaged in planning and construction on 8 other projects which ultimately will command about 25,000 ha. Most of these projects are located in the Sierra where a high priority for rehabilitation and extension of existing projects has been assigned on social grounds rather than for economic reasons. These projects, however, represent a small part of the estimated potential area in the country, which would be suitable for developing the land and water resources. The coastal area has the best potential for large projects with better economic prospects. The Milagro project would be one of the first to be undertaken in this area and an important first step in eventual development of the extensive irrigation potential in the Guayas river basin. III. THE PROJECT AREA General 3.01 The project area is located in the western part of Ecuador in the tropical coastal zone, about 40 km east of the City of Guayaquil. The area proposed for development lies adjacent to the Rio Milagro and the Rio Chimbo, which are tributaries to the Rio Guayas, and within the Province of Guayas (Map No. 10278). Topography in the area is uniform which makes the land suitable for irrigation and on-farm development. The climate is tropical and is characterized by a wet season from mid-December to mid-May and a dry season during the remainder of the year. Annual rainfall during recent years has averaged 1,000 mm, with less than 100 mm during the dry season. Humidity is high, averaging over 80% throughout the year, and temperatures range from 23'C in July to 26'C in March. Cloud overcast occurs more than 75% of the daylight hours and wind velocities are low. 3.02 The soils in the project area are mainly recent alluvium and strati- fied, ranging from medium textured loams and silt loams to moderately coarse textured sandy loams. They are well adapted to cultivation of a wide range of crops under irrigation. Addittonal information on conditions in the project area are presented in Annex 1.  -4- Population and Land Tenure 3.03 The rural population in the project area is estimated at 6,000 persons. This does not include the City of Milagro (just outside the area with a population or about 40,000) or the Village of Naranjito, on the south boundary of the project area. Two small villages, Mariscal Sucre and Venecia, are located within the area. The 1962 census in the Canton of Milagro gave a total population of 62,000, which would benefit indirectly from the project. I- is evident that the number of people in the general area has increased rapidly in recent years, due in part to immigration following initiation of the land reform program in 1964 and improvement of the highway to Guayaquil and the new bridge across the Guayas river. A recent survey revealed thal: about 25% of the present population were immigrants and that approximately 50% of these came from the mountainous region, which contributes to relieving land pressure in the Sierra. The area is almost totally dependent on agri- culture and the two large sugar plantations, San Carlos (15,000 ha) on the south boundary and Valdez (7,000 ha) on the west boundary, offer sizeable employment opportunities. Unemployment does not appear to be a critical problem in the area; however, the seasonal work peaks create underemployment during the off-season. One indication of the labor situation is that farm workers or owners from the high valleys in the Andes find employment in the Milagro area during seasons of peak employment. There is some competition on wage rates between the sugar estates and private farmers which at times makes it difficult for the latter to find laborers on a temporary basis. 3.04 The land tenure pattern in the project area is the result of unre- gulated use and acquisition which occurred over a period of more than 20 years. The 825 farms in the project were fo!merly part of four large haciendas and the present owners occupied the land as renters, tenants, squatters, and, in some cases, by purchase from former owners. In 1964 IERAC began a program to expropriate these lands, establish farm boundaries on the basis of existing use and occupancy and issue land titles to the farmers. This was one of the first programs to be undertaken by IERAC under the new law which gave the agency power to give workers title to the lands they cultivated, to colonize public domain and to expropriate under-used private lands and settle landless families. A small part of the expropriated land, less than 10%, was settled by landless families on tracts of one to two hectares. The new owners were required to pay for the land over a period of years and this resulted in exchanges which reduced the size of some farms and increased the size of others. iln a sense land reform in the area has consisted of legalizing existing occu- pancy rather than expropriation and redistribution. Further reform to rationalize farm sizes would be strongly resisted by present owners who won title to their land following a long period of controversy. About 80% have paid for their land and received titles and the balance are expected to com- plete their payments and receive titles within the next five years. 3.05 This tenancy pattern, as shown in the following table, would not seriously constrain production on the project, since 83% of the project area is in farms ranging from 5 to 50 ha, which are economically viable for ir- rigat